The Core PCE Report Gave Hope for a Softening Stance by the Federal Reserve.

The confidence level of central bank leaders in further interest rate hikes is increasing, as demonstrated by the ECB symposium in Sintra. Powell stated that the policy may not be restrictive enough, and current expectations regarding the duration of the period of high interest rates may be underestimated by the market. He also acknowledged the possibility that the FOMC would decide to raise rates at two consecutive meetings before taking a pause. In turn, Christine Lagarde reinforced market expectations regarding a rate hike in July.However, the market impact of these comments was not as significant as the reports on US GDP and Core PCE, which stirred the market. With expectations at 1.4%, US GDP growth in the first quarter reached 2%. Along with the positive surprise in unemployment benefit claims data (both initial and continuing claims dropped sharply), this caused a significant increase in US Treasury yields, the dollar, and a decrease in gold prices:Gold declined to $1893 per ounce, the US Dollar Index (DXY) tested the 103.50 zone, and the yield on short-term two-year bonds jumped by over 12 basis points, eventually reaching 4.94% and heading towards the March 2023 peak of 5.08%. The GDP report was seen as confirmation of Powell's position expressed in Sintra. However, on Friday, the Core PCE report (a measure of inflation through changes in consumer spending) introduced some doubt to the hawkish stance of the Federal Reserve. In May, the year-on-year core inflation stood at 4.6%, 0.1% lower than the forecast. The lower growth rate was attributed to modest monthly consumer spending growth of 0.1% instead of the predicted 0.2%. It is worth noting that the GDP data pertains to the first quarter, while the inflation report relates to the second quarter, so the first report does not negate the second. The market responded accordingly: the yield on two-year bonds halted its rise and began to decline, losing around 6 basis points, the US Dollar Index returned below 103 points, and gold started to increase in price. Thus, a barrier emerged for a further dollar rally and a decline in gold, the strength of which will depend on incoming data next week, particularly the US labor market data and ISM activity indices.However, it is worth noting that Powell predicted at the Sintra symposium that all the inflation woes would be tied to the labor market. The Fed Chair's forecast, as well as the recent positive dynamics in unemployment benefits, allows for expectations of a strong NFP report next week. As a result, market participants are likely to anticipate a positive surprise, so the dollar rally and gold decline have a good chance of continuing in the first half of next week: